The prospect of taking on debt can be nerve-racking, but borrowing money can also help you make life-changing purchases. From funding your higher education to buying a home to meeting other financial needs, most people borrow money eventually. It’s a good idea to remember that it is always a financial risk when you borrow money, so it is important to do your research before making this kind of financial commitment. If you aren’t sure you are ready to borrow money, check out the information below.
How to Prepare
Before you make any borrowing decision, it’s important to ask yourself whether the associated debt is necessary and to also have a plan for how you will pay it back. If it still seems like a good idea, you can get ready for the application process by getting familiar with your credit history.
It’s a good idea to request a copy of your free annual credit report well before submitting any applications, review it and dispute any errors you find. It’s also a good idea to check your credit scores (you can get two free credit scores, updated every 14 days, from Credit.com). If your score looks like it may deter you from qualifying for favorable loan terms, you can look for ways to build up your credit score before you apply.
Next, make a list of your purchasing goals for the next few years and try to assess where you may need to borrow money and how that could affect your budget and overall financial future.
What to Look Out for
When it comes to taking out loans, it’s important to look at all your options. Comparison shopping can save you a lot of money. Look for a loan that meets your requirements and will result in monthly payments you can afford. Important factors to consider include interest rate, any prepayment penalties, and even insurance add-ons that can get rather expensive. Once you choose your loan, be sure you really know the terms and stay up to date throughout the repayment process.
How to Keep Up
It’s a good idea to plan how you are going to pay back any loan before you even take any money. If you aren’t already keeping a budget, this is a good time to start. If you don’t have one in place, track your income and spending. Then sit down and go over your records, decide where you can adjust, and build in your new loan payments. If you can, it can be a good idea to try living on the new budget (with the loan payments) before you take out the loan. For example, if you are thinking of taking out a mortgage that will change your current housing costs, you may want to try living off that lower amount for a few months while putting the amount you will be paying on your mortgage into a special account. This can then serve as your emergency fund in the future.
To ensure you make every payment on time you may want to try setting reminders or making the payments automatic. This removes the temptation to overspend as the repayment funds are never in your hands. Just be careful to have enough money in your checking or savings account so you don’t overdraft and incur a fee.
Lastly, if you are having trouble paying back your loan on time, you may want to seek help. You can turn to a nonprofit credit counseling organization, family member, friend or financial adviser for guidance.
Borrowing money has its pros and cons, but most of us will need a loan at some point. The choices we make about when, how, and how much to borrow can have a big impact on our finances. The more you get educated on the topic, the more likely you are to stay fiscally healthy — so study up and remember the tips above as you move forward.
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